- US dollar turns bullish supported by rising yields.
- USDCAD shrugging dollar strength.
- EURUSD under pressure amid dollar strength.
The US dollar was on the front foot Wednesday morning after registering sharp gains against the majors on Tuesday. The dollar index, which tracks the greenback strength, has bottomed out of two months low, all but affirming growing long bets on the USD.
The dollar strength can be attributed to, among other things, a spike in US treasury yields to one-year highs. The 10-year yield has already powered to highs of 1.88% on the back of growing expectations that the Federal Reserve (FED) will hike interest rates.
USDCAD technical analysis
While most of the majors are under immense pressure amid dollar strength, the Canadian dollar is holding steady. USDCAD has already dropped to two-month lows of 1.2504, all but affirming growing bets on the CAD against the greenback.
With bears in control, a break below the 1.2500 psychological levels could lead to a drop to the 1.2440 mark, the next substantial support level. A sell-off followed by a close below the 1.2440 would affirm the downtrend, all but paving the way for bears to steer a sell-off to the 1.2380 level.
Conversely, USDCAD holding firm above the 1.2500 could fuel a bounce back to about 1.2558 resistance levels. Bulls need to steer a rally followed by a close above the resistance level to affirm an end of the current downtrend.
Factors driving USDCAD lower
Justifying the bearish momentum on USDCAD amid dollar strength across the board is the surge in oil, Canada’s main export item, to seven-year highs. US oil powering to about $86 a barrel has all but helped offer strength to the CAD, conversely shrugging off dollar strength across the board.
In addition, the bearish biases on USDCAD remains supported by interest rate futures hinting at a 70% probability of the Bank of Canada announcing a rate hike next week. The Canadian central bank hiking ahead of the Federal Reserve is one catalyst that should continue to fuel CAD strength against the dollar.
Looking ahead, focus is on the release of Canada’s inflation data with CPI Core expected at 3.5% versus 3.6% prior. The December Consumer Price Index is expected at 4.8% from 4.7% as of November. The outcome of the economic data could influence rate hike bets, which should influence USDCAD price action.
Meanwhile, EURUSD registered its biggest loss for 2022 as it came under immense pressure on the dollar registering sharp gains. The pair, which has clocked three days of losses, slumped to one-week lows of 1.1335.
The pair is back to its 50 day moving average and at risk of plunging below the pivotal 1.1300 psychological level, going by the dollar bullishness across the board. A breach of the 1.1300 support level would bring to an end the recent uptrend that saw the pair power to two months highs of 1.1470.
The sell-off comes on the dollar strengthening on US treasury yields edging higher and hinting of rate hikes sooner than later. On the other hand, the eurozone is struggling with runaway inflation expected to reach highs of 4.1% in the first quarter.
In contrast, the European Central Bank (ECB) has refrained from engaging in any monetary tightening to stem inflationary pressures. It is still unclear when the ECB will end its Asset Purchase Program at a time when most central banks have started tightening policy.
With the FED hinting it could hike interest rates and start offloading holdings on bonds, the euro could remain under pressure against the dollar going forward.